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Auto Show Conundrum

Sigma Investment Counselors

January 22, 2014

The North American International Auto Show is currently in Detroit and a quick look suggests that the major theme is “bigger and faster”. The car of the year is the Chevrolet Corvette Stingray, a street legal rocket, and the truck of the year is Chevrolet’s Silverado, a 5,000 lb. behemoth. The industry has made great strides in improving the efficient use of a gallon of gasoline, but a lot of the benefits have been directed toward bigger and faster, rather than fuel economy.

In fairness, looking at the monthly sales data, this is what the customers seem to want. Despite a marked increase in the variety and availability of hybrid and plug-in vehicles, they still account for only 3% of annual vehicle sales, with approximately half, members of Toyota’s Prius group. The much heralded Tesla S accounts for about 25,000 annual sales out of an industry total of nearly 16 million.

All of this suggests that, in an era where oil is relatively inexpensive and abundant, a regulation requiring average fuel economy of 54.5 miles per gallon for the fleet in 2025 may not be practical without a major shift in consumer preferences.

Investors should consider the implications of the above for the vehicle industry. In addition, investors should carefully consider the potential for similar conundrums for other industries. Is the customer right or is the mandate right? No easy answers, but companies in a wide range of industries are facing significant disparities between customer preferences and the desires of environmentalists and other groups that purport to “know better”.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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